Ferret's Stock to Watch: SIMS 07:36, Wednesday, 22 September 2004
A COMPANY LEADING THE WORLD IN METALS RECYCLING
Sydney - Wednesday - September 22: (RWE) ****************************************
OVERVIEW ********
Sims Group Ltd chief executive Jeremy Sutcliffe said Monday he now expected first-quarter earnings to exceed $50 million.
This came as a pleasant surprise to shareholders and investors who whipped up strong interest in the stock.
On August 23, in announcing its 2004 full-year results, the company forecast its earnings for the first quarter of fiscal 2005 "would match or exceed those of the fourth quarter of F2004 (prior to the write-off in that quarter)".
Reported earnings for the fourth quarter 2004 were $35.46 million which, after adding back an after-tax effect of $5.23 million in respect of the write-off, put underlying earnings at $40.69 million.
About a month ago, after the SIMS GROUP announced its 50 per cent profit rise for the year, we pondered over the question why the market kept the p/e ratios of some stocks under a tight leash, such as the Sims Group.
Sims's hot result was well anticipated and the shares basically did nothing initially after the announcement.
That was despite the stock then being on a below market average p/e of a bit over 10 and a future p/e of about 8, assuming Sims scored only half the profit rise this year that it did in the last.
Apparently Sims profit is accelerating so fast the company can barely keep up.
A month ago, when reporting the year's results, Sims CEO Jeremy Sutcliffe predicted "with some confidence" that this year's first quarter would match or exceed last year's fourth quarter of $35.5 million.
On Monday he alerted the market to the fact that the company now expected its first-quarter earnings for fiscal 2005 to exceed $50 million.
Mr Sutcliffe said that at the time of announcing the 2004 full-year results, "we noted that sales for the fourth quarter were lower than expected and consequently inventory levels were higher than anticipated.
"During the first quarter, we have been successful in reducing inventories back to normal levels.
"As a consequence of this, and also of continuing favourable market conditions, earnings will be higher than previously forecast."
Mr Sutcliffe said it was too early to predict earnings for the second quarter with a high degree of accuracy, "although it is fair to say that whilst likely to be strong, they will not match the first quarter as no further de-stocking is anticipated and because of the seasonal impact of the month of December".
Shareholders will receive a progress report with the first-quarter results and an the annual meeting.
Whatever, but it seems our earlier estimate of a future p/e for the stock of about 8 times was conservative.
SHARE PRICE MOVEMENTS *********************
Shares of Sims Group surged ahead 27c to a record $13.45 yesterday. News of the massive earnings result released on Monday before the opening bell. Traders had to think twice as the company went ex a 60c dividend on the shares.
The final distribution comprised a final 40c and a special 20c. The shares first sold sale at $12.40, down 31c on Friday, but up 29c if you added back the dividend. It rose rapidly after a scramble for the shares developed in the last hour of business.
Shaw Stockbroking has recommended the Sims Group as a hold:
It expects first quarter upgrade and more special dividends.
The profit advance is driven by a sell down of inventory combining with strong prices brought on by Chinese and US demand and a weaker Aussie dollar.
Shaw is currently predicting a FY05 NPAT of $152m (PE 7.5x
However, this forecast will remain volatile and we note it appears to be a result that represents top of cycle earnings.
Using long term assumptions it would appear SMS is on a PE closer to 14x although again this number remains hard to predict.
With strong cashflow and an even stronger balance sheet we believe SMS will reward shareholders with further special dividends and FY05 dividends could end up between 80cps and $1ps.
At current price we rate SMS a hold for yield.
Mr Sutcliffe told the ASX that "based on our predicted shipping program for the remainder of September, we would expect earnings to be at least $50 million for the first quarter, exceeding underlying earnings for fourth quarter of fiscal 2004 by more than 22.5 per cent."
Mr Sutcliffe noted the impact of de-stocking throughout the quarter would contribute around $4.5 million in earnings.
"They will not match the first quarter as no further de-stocking is anticipated and because of the seasonal impact of the month of December," he declared.
Further outlook statements will be given with the company's first-quarter results and at the annual general meeting.
BACKGROUND **********
Sims Group Ltd is an international recycling company with a clear vision to expand its core metal recycling activities while developing an innovative recycling services and solutions business.
The company was formerly known as Simsmetal Ltd and operates in the ferrous and non-ferrous metal recycling industries as well as processing metals and plastics.
The Sims Group is found in Australia, North America, Asia and Europe.
It is the largest metal recycling company in the Southern Hemisphere with operations in both ferrous and non-ferrous recycling and industrial services.
Activities cover processing, logistic and material handling
solutions, resource recovery and testing and analysis of waste metals.
Over the past 15 years, the company has successfully expanded from an Australian based division of a mining conglomerate to become the only truly global metals recycling company with operations spanning four continents.
Jeremy Sutcliffe, group chief executive posted the these remarks about the group's strategy on the Sims's website.
"With the support of our key asset, our people, we intend to continue with this growth strategy.
"In addition to achieving shareholder value, acquisitions in any new market must place us in a position to be a leading operator in that market and offer the ability to service both domestic and international export markets.
"At the same time, we intend to organically grow our business of processing a whole range of recyclables which legislation, particularly in the EU, requires.
"This will involve a focus on technological initiatives to enable us to achieve cost effective end of life product solutions, Sutcliffe declared.
